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Are global investors running out of real estate?

Global real estate investment transactions rose by 2.2% in Q3 2017 over the same quarter in 2016.1 The year-to-date (Q1-Q3) volume, at US$660 billion, is also up on 2016, by 2.8%. The market is transacting at a high level of activity, but the growth in volumes is not what it was. Between 2009 and 2015, the average annual growth in real estate capital flows was 31%. Many factors are involved, but, at the start of the year, 25% of investors responding to a global survey stated that access to available properties was the main obstacle to investment.2 Is this a bigger issue than the survey evidence suggests?

Follow the financing.

Capital held by pension funds, insurance companies and sovereign wealth funds, for investment in all assets, has grown strongly over the last decade and now stands at US$94 trillion.3 Based on global surveys of asset allocations4 and our own calculations, we estimate that US$8.5 trillion is targeting real estate. However, there is a substantive under-allocation of real estate equity and, as of 2017, only US$6.5 trillion has been deployed.5

The market capitalization of the global REIT sector, which broadly equates to the amount of equity capital invested, is US$1.6 trillion.6 And, global private wealth is US$67 trillion, and we estimate that US$4 trillion of this is deployed in commercial real estate, although this could easily be higher.

On the debt side, data is very difficult to come by except in the U.S., where we know that there was US$3.9 trillion of public and private debt in Q3 2017. We estimate that there is US$1.2 trillion of debt in Europe and US$2.1 trillion in Asia Pacific. Summing these and estimating for Latin America suggests a global total of US$8.2 trillion.

How does this compare to the global real estate universe?

In 2016, the total value of investable real estate in the world was US$27 trillion.7 Figure 1 shows how this is financed. Note that the 7% of institutional under-allocation has not yet been deployed in global real estate, so that chunk is currently held by owner-occupiers and private wealth.

How easy will it be for institutions to acquire the properties they require?

Not too difficult in the near future, although it will require creativity and ingenuity. An ample supply of investment property is available in the corporate sector, particularly in Asia and Europe where owner occupation rates are higher. My colleague Guy Ponticiello, Managing Director of CBRE Capital Markets, has seen a large uptick in sale-leaseback activity over the last 18 months. “Corporates are keen to access capital in this very efficient way,” he said recently. “The marketplace there for long-term income streams is competitive and global.” Investors may also need to be more active in funding new developments and push further into the residential sector.

Going forward, the sources of capital seeking to deploy in real estate will increase more rapidly than the supply of properties available in which to invest. Institutional equity is growing very strongly, fueled by 160 million new members of the middle class each year—88% of whom will be in Asia.8 Moreover, the global average allocation to real estate will grow from 9% in 2017 to 10.1% in 2020, driven by an increasing preference for real estate by Asian institutions. Institutional equity targeting real estate will grow from US$8.5 trillion now to US$11.4 trillion in 2020. Debt growth is also strong as banks are cast off the legacy of the Great Financial Crisis.

The message of Figure 1 is that there remains a reasonable supply of real estate. However, the supply will expand at about 3% the rate of GDP growth—and the amount of equity at about 9%—so finding properties in which to invest will be a growing issue over time. Investors should move quickly to execute their long-term plans.